Safehaven | What is Next for the Dow Jones Industrial Average?

October 17, 2005

What is Next for the Dow Jones Industrial Average?
by Erich Soltes

A long term technical analysis of the daily, weekly and monthly charts for the Dow Jones Industrial Average.

This is explanation of varies technical indicators that make up the Alpha Trend System.
In the lower window of the chart you will see the following indicators.
The main trend line for a security is the Alpha Trend this is denoted by the bold red line.
It is from this trend line that all other support/resistance lines are developed. The Alpha Trend is an adaptive moving average that uses proprietary mathematical formulas to create the base line movement of the selected security. From the Alpha Trend I then created three separate progression/regression price areas using Fibonacci ratios, which I call the 1^st Alpha waves, 2^nd Alpha waves and 3^rd Alpha waves. It is these three wave areas that define the vast majority of a security's price movement. Moving out from the Alpha Trend, the 1^st Alpha waves are denoted by the dark blue lines. This is the price range that a security will normally move to once the price of the Alpha Trend line is crossed in either direction. Next are the 2^nd Alpha waves which are denoted by the light blue lines. It is this area between the 2^nd Alpha waves where 79.82% of the time a security's price will remain. Last are the 3^rd Alpha waves which are denoted by the violet lines. Once a security's price reaches this area it is in an extreme overbought/oversold condition. A security can stay in this area for awhile, but this usually represents a poor price in which to place a trade in the prevailing trend.

The next three moving averages are the one year moving average of the Alpha Trend denoted by the bold violet line, the five year moving average of the Alpha Trend denoted by the bold green line, and the ten year moving average of the Alpha Trend denoted by the bold black line. Each of these moving averages is set for the different time frames of a chart. On the daily chart the one year moving is 240 days, the five year is 1200 days and the ten year is 2400 days. On the weekly charts the one year moving average is 52 weeks, the five year moving average is 260 weeks and the ten year moving average is 520 weeks. Lastly, for the monthly charts the one year moving average is 12 months, the five year moving average is 60 months and the ten year moving average is 120 months.

In the upper window is my own relative strength indicator denoted by the bold blue line. This indicator measure the strength of the trend, "0" is overbought and "-100" is oversold. This indicator measures the strength of the price movement between the 3^rd Alpha waves.

Above is the daily chart for the Dow.

Currently the daily position for the Dow is Long. The current sell price is 10,288.1357 . The current trend for the Dow is bearish. The Alpha Trend is trending down. Today's closing price is 1.5221 percent to the resistance price of Alpha Trend. The Alpha Trend resistance price is 10,446.30. The one year moving average of the Alpha Trend is trending up. Today's closing price is 2.0499 percent to the resistance price of the one year moving average of the Alpha Trend. The one year moving average of the Alpha Trend resistance price is 10,502.5879. The relative strength indicator is trending up. On a daily basis, the Dow has found a short term a bottom at the lower 1^st Alpha Wave band. The relative strength indictor is turning up. All of which suggest that the Dow should rally up to the Alpha Trend resistance price of 10,446.30. The Dow's strength has been fading since mid July, each rally has had lower relative strength numbers. This weakness suggests that the rally that started on Friday will be short lived. For this rally to have legs the Dow will have to get above the Alpha Trend price of 10,446.30 and the year moving average of the Alpha Trend price of 10,502.5879.

Above is the weekly chart for the Dow.

The current weekly position is Short. The current sell price is 10,163.3252. The Current trend is bearish. The Alpha Trend is trending up. Today's closing price is 1.9104 percent to the resistance price of Alpha Trend. The Alpha Trend resistance price is 10,487.6533. The one year moving average of the Alpha Trend is trending up. Today's closing price is 1.1909 percent to the resistance price of the one year moving average of the Alpha Trend. The one year moving average of the Alpha Trend resistance price is 10,411.2861. The relative strength indicator is trending down. When the weekly chart of the Dow is analyzed the weakness of the rally since April 22, 2005 is even more apparent. For the last four weeks the Dow has been breaking down and even more importantly this week's price action has been unable to make any gains. The relative strength is falling and this week's price action is below both the Alpha Trend and the one year moving average of the Alpha Trend. All of this suggests that the Dow will fall to at least the lower 1^st Alpha Wave band currently at 9945 before that next meaningful rally can begin.

Above is the monthly chart for the Dow.

The Current trend is bearish. The Alpha Trend is trending up. Today's closing price is 0.3947 percent to the resistance price of Alpha Trend. The Alpha Trend resistance price is 10,328.0654. The one year moving average of the Alpha Trend is trending up. Today's closing price is 2.5678 percent to the support price of the one year moving average of the Alpha Trend. The one year moving average of the Alpha Trend Support price is 10,029.7568. The relative strength indicator is trending down. The monthly chart is indicating that the Dow is breaking down. The relative strength indicator is falling and has been since the end of June 2005. Additionally, the current price of the Dow is below the Alpha Trend this is the first time since July of 2003. The Alpha Trend has been a major support line for over two years and with the breakdown of the relative strength indicator this all points to the Dow to continue to weaken. The current price is only 2.57 % above the one year moving average of the Alpha Trend. If the Dow closes below this level on a monthly basis we should see a continuation of the bear market to the lower 1^st Alpha Wave band, currently at 9078.

In conclusion the daily chart is indicating that the Dow has found a short term bottom. The weekly and the monthly charts are both indicating that the Dow will continue to weaken. Over the next several trading sessions the Dow should move up to the Daily Alpha Trend price of 10,446.30 a 1.52% rise however if this resistance price is not broken the Dow will then reverse and continue it's retreat to the next major support price range of 9945 -10,029. Once this pattern unfolds I will reassess the Dow to determine the next major move for the Dow.

To learn more about the Alpha Trend System please visit alphatrendanalysis.com.

This site provides a daily analysis and charts for the following futures: 10 year Bond, 30 Bond, CRB Index, Gold, Lt Sweet Crude, Natural Gas, Silver, US Dollar, Unleaded Gas and the following and stock indices; Dow Jones Industrial, Dow Jones Transportation, Dow Jones Utilities, NASDAQ Composite, S+P 500 and the XAU Index.

Erich K. Soltes
AlphaTrendAnalysis.com

A graduate of Brookfield High School in Brookfield CT and an Eagle Scout, Erich went on to graduate from SUNY Maritime College in New York City in 1988, with a BS in Marine Transportation and a minor in Economics. For the next ten years he was a Navel Reserve officer and a Merchant Marine officer. In 1998 he went to work on Wall Street obtaining his series 7, 63 and 65 licenses. He worked both as a stockbroker and a financial planner helping clients obtain their financial goals. In 2004 he was able to finally reach his goal of developing a mathematical trading model that could beat the "buy and hold" method of investing. In mid 2005 the Alpha Trend Analysis website that you see before was created.

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Erich K. Soltes is the Owner of Alpha Trend Analysis, which contains the opinions of Erich K. Soltes, and is provided for informational purposes only. Neither Erich K. Soltes nor Alpha Trend Analysis, provide individual investment advice and will not advise you personally concerning the nature, potential, value, or of any particular stock or investment strategy. To the extent that any of the information contained in this article may be deemed investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Past results of Alpha Trend Analysis, or Erich K. Soltes are not necessarily indicative of future performance. Erich Soltes, entities that he controls, family, and associates , may have positions in securities mentioned in this article and may close them at any time.

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